Three business partners who set up a scheme to avoid paying Vat on the sale of holiday homes in West Cork have lost their long-running legal challenge against a tax-assessment by Revenue.
It follows yesterday’s ruling, by the European Court of Justice, that business transactions which are “an abusive practice”, designed to avoid paying Vat under EU case law, are prohibited, even in the absence of national legislation.
The judgement means the three men — Edward Cussens, John Jennings, and Vincent Kingston — will be liable for the full Vat bill issued by Revenue on the sale of 15 holiday homes, which they had developed on land they owned in Baltimore, Co Cork.
In order to reduce their exposure to Vat, the three men had entered into a long-term lease for the properties with a related company, Shamrock Estates, in March, 2002, which then immediately leased them back to the co-owners on a short-term lease.
A month later, the leases were surrendered and full ownership reverted back to the three men. The properties were then subsequently sold to other buyers, for a combined value of €3m.
Under Irish law, the short-term lease, the reversion back to the original owners, and the subsequent sale of the properties to third parties were all exempt from Vat. Only the long-term lease was subject to Vat.
The result of the transactions meant the three men had reduced their Vat liability from €125,746 to €40,000 — a saving of over €85,000.
However, Revenue ruled the pre-sales transactions were an artificial construction and should be ignored for the calculation of Vat that was liable to be paid.
In 2007, in the Circuit Court, the three men unsuccessfully appealed the Vat assessment by Revenue.
In evidence, Mr Cussens, an accountant, told Cork Circuit Court that the transactions had been put in place on the advice of their tax advisors, Deloitte & Touche.
Following an appeal by the three men, the High Court ruled that the leases lacked commercial reality and constituted an abusive practice under EU case law. They appealed that ruling to the Supreme Court, which referred the case to the ECJ.
Yesterday, the Luxembourg-based court ruled that tax authorities can refuse people the right to an exemption from Vat, in the absence of national legislation providing for such refusals, under the principle regarding ‘abusive practices’.
It also said the application of the principle that abusive practices were prohibited was relevant, despite the fact that the sale of the properties in Baltimore occurred before the EU case law that clarified the issue.
The ECJ said it should have been known by parties what abusive practices were, before the issue had been interpreted by the ECJ, in a 2006 ruling.
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